Avoid These Common Business Credit Missteps
It can be imperative for a company to build business credit if it’s interested in someday accessing outside funds or purchasing goods on credit. This is because a business’s credit scores and ratings are often considered by lenders, investors, potential partners, and others in order to gauge the level of risk they assume by working with that business. A poor or non-existent business credit file may hinder opportunities for growth. Many small business owners understand this and strive to achieve a strong company credit file. Unfortunately, they sometimes make mistakes that wind up working against their goals.
Here are five common mistakes to avoid when trying to establish and build your company’s credit:
5. Failing to Update Business Information
When you’re trying to build your business credit rating, details matter. But attention to detail can sometimes falter in the face of the countless applications, filings, and documents needed when starting up a business or entering into a new agreement with suppliers and vendors. If your business moves, changes names, or gets a new phone number, Dun & Bradstreet may not be able to match recent information with the right business. Make sure to keep the business’s information separate from your own; don’t list your personal cell phone number if the company has a dedicated line. In order for a business to potentially build and maintain its business credit, all of its supporting documents should feature information identical to that on file with the business credit bureaus.
Solution: Luckily, Dun & Bradstreet makes it easy to edit business details through its free D‑U‑N‑S® Manager tool. It’s a good idea to review this information on a regular basis to help ensure it reflects the current state of your business.
4. Using Trade Credit From Vendors That Don’t Report
When a company extends trade credit to another business, it agrees to provide goods or services for a promise to pay at a later date. Especially useful for new businesses without much liquidity, trade credit is often much easier to come by than traditional business loans. In order to help impact your business’s credit scores and ratings, though, it may not be enough simply to pay invoices on time. It can also be important that your vendors report payment experiences to Dun & Bradstreet.
Solution: Ask your suppliers whether or not they're sharing payment experiences with the business credit bureaus. Assuming you have a good business relationship, they should be happy to oblige a fiscally responsible customer. Please note that these payment experiences, or Trade References*, are subject to Dun & Bradstreet's verification process.
3. Paying Bills With Personal Checks or Credit Cards
In addition to paying their bills on time or ahead of schedule (as Trade References can heavily influence a company’s credit scores and ratings), business owners should strive to use company checks or credit cards to pay their bills in order to keep their personal and business credit separate. A business’s credit file is only supposed to reflect the financial performance of the company itself and using personal payment methods can muddy the waters, as Dun & Bradstreet takes into account payments made by the company itself, not individuals.
Solution: Keep your personal and business finances separate. As we’ll see below, that’s not always as easy as it might seem.
2. Applying for Business Credit Cards That Are Actually Personal Credit Cards
You could be forgiven for thinking that a business credit card will help you build business credit – it’s practically right there in the name. However, many business credit cards are actually tied to the owner’s personal credit file. This is because most new businesses lack the credit history that card issuers can take into consideration when trying to understand a company’s ability to pay. It’s an important distinction, since on-time payments and responsible financial behavior may benefit the individual’s credit score rather than the business’s credit file.
Solution: Business owners should read the fine print of their credit card contracts in order to understand what the lender is actually offering. A business credit card can still provide access to capital, but it’s usually not an effective tool for building business credit.
1. Selecting the Wrong Business Structure
The company’s business structure can have major implications for how its credibility is established. It’s important to understand the differences as soon as possible in order to avoid surprises later on.
Popular with many small business owners, the sole proprietorship is a simple approach that considers a business and its owner as a single entity. You don’t need to file any paperwork to start a sole proprietorship. Also, business earnings and losses are reported on a business owner’s personal income tax return.
While this may seem like the easiest route to organizing a business, there can be drawbacks. The owner is liable for legal judgments against the company. Most importantly for the purposes of this discussion, a sole proprietorship cannot establish a separate business credit file. That means potential lenders and partners will only have your personal credit history to go on when considering doing business with your sole proprietorship. Your past financial mistakes can impact the credibility of your business. Likewise, your business’s defaults, missed payments, or other financial struggles can damage your personal credit score.
A corporation is a separate legal entity that can build its own business credit file. Why is this important? Detrimental information added to your personal credit file should not damage that of the corporation. Conversely, your personal credit score should be somewhat insulated from the actions of your company. This would not be the case if you operated as a sole proprietorship.
Solution: How to structure your business is an important decision worthy of consideration. It’s advisable to consult an attorney when deciding which business structure is best for your company.
*Trade References will be added subject to Dun & Bradstreet verification and acceptance. Dun & Bradstreet cannot guarantee that trade references will be accepted or that accepted trade references will impact your business credit file. Please see https://www.dandb.com/glossary/trade-references/ for eligibility, process and other information regarding Trade References.